Reasons why local banks in Cameroon failed in the period 1980-1990

Financial difficulties have affected numerous local banks in Cameroon, many of which have been closed by regulatory authorities or have been restructured under their supervision. In

Cameroonian banks such as BICIC Meridian BIAO Cameroon Bank were closed

Many more local banks were in trouble and subject to some kind of

“withholding action”. Failing local banks accounted for as much as 23 percent of total business.

banking assets in Cameroon.

The cost of these bank failures is very difficult to estimate: much of the data is not in

the public domain, while the eventual cost to depositors and/or contributors of most

bank failures that occurred between the period 1988 to 2004 will depend on the amount of assets of the failed banks that are finally recovered by the liquidators. The costs are almost certain to be substantial.

Most of these bank failures were caused by non-performing loans. Areas that affect the most

than half of the loan portfolio were typical of failed banks. Many of the bad debts were

attributable to moral hazard: the adverse incentives on bank owners to take reckless actions

lending strategies, in particular insider lending and high interest rate lending to borrowers

in the riskiest segments of the credit markets.

insider lending

The largest single contributor to the bad loans of many of the failed local banks was

Insider loan. In at least half of the bank failures mentioned above, internal loans accounted for

for a substantial proportion of bad debts. Most of the large local bank failures in Cameroon,

such as Cameroon Bank, BIAO Bank and BICIC Bank, involved many experts

loans, often to politicians. Internal loans represented 65 percent of total loans from

these local banks, virtually all of which was unrecoverable.

Almost half of the loan portfolio of one of the local banks had been extended to its directors and employees. The threat posed by internal lending to the soundness of banks was exacerbated as many of the internal loans were invested in speculative projects such as real estate development, breached large loan exposure limits, and were extended to projects that could not generate returns at short-term (such as hotels and shopping malls), with the result that the maturities of bank assets and liabilities were recklessly out of date.

The high incidence of insider lending among failed banks suggests that morality issues

danger were especially acute on these banks. Several factors contributed to this.

First, politicians were involved as shareholders and directors of some of the local banks.

Political connections were used to obtain deposits from the public sector: many of the failing banks,

it relied heavily on wholesale deposits from a small number of companies.

Due to political pressure, the small banks that made these deposits are unlikely to have

he made a purely commercial judgment as to the safety of his deposits. Also, the

the availability of microdeposits reduced the need to mobilize funds from the public. That’s why

these banks faced little pressure from depositors to establish a reputation for safety.

Political connections also facilitated access to banking licenses and were used in some cases to

pressure bank regulators not to take action against banks when they violate banking laws

they were discovered. All of these factors reduced the constraints on reckless bank management.

In addition, the banks’ reliance on political connections meant that they were exposed to

pressure to lend to the politicians themselves in exchange for the help given to obtain

deposits, licenses, etc. Several of the largest domestic loans made by failed banks in Cameroon

they were for prominent politicians.

Second, most failed banks were not capitalized, in part because the minimum

The capital requirements in effect when they were established were very low. The owners had little

their own funds at risk in the event of the bankruptcy of their bank, which created a large asymmetry in the

Potential risks and benefits of domestic lending. Bank owners could invest bank deposits

on their own high-risk projects, knowing that they would reap huge profits if their projects

they were successful, but they would lose little of their own money if they were not profitable

The third factor that contributed to insider lending was the excessive concentration of

property. In many of the failing banks, the majority of the shares were held by a man or a woman.

family, while the managers lacked sufficient independence from the interference of the owners in

operational decisions. A more diversified ownership structure and greater independence

The administration might have been expected to place further restrictions on insider lending,

because at least some of the directors could have lost more than they gained from

insider lending, while managers would not have wanted to risk their reputations and careers.

The high cost of funds meant that local banks had to generate high profits from

your assets; for example, charging high loan rates, with consequences for the quality of

their loan portfolios. Local banks almost inevitably suffered from adverse bank selection.

its borrowers, many of whom had been turned down by foreign banks (or would have been

if they had applied for a loan) because they did not meet the strict solvency criteria

demanded of them. Because they had to charge higher loan rates to make up for the

higher cost of funds, it was very difficult for local banks to compete with foreign ones

banks for “prime” borrowers (ie, the most creditworthy borrowers). As a result, the

Credit markets were segmented, with many of the local banks operating in the riskiest sectors.

segment, serving borrowers willing to pay high loan rates because they could not access

alternative sources of credit. Subprime borrowers included other banks that were

short of liquidity and willing to pay interest rates above market rates for interbank deposits and

lending We all experienced in Douala and Yaoundé how some of the local banks were very exposed to financing houses which collapsed in large numbers in the 1990s.

Consequently, the banking crisis had ripple effects due to the extent to which

local banks are slow to each other.

Within the segments of the credit market served by local banks, there were probably

good-quality (ie, creditworthy) borrowers as well as low-quality risks. but serving

Borrowers in this section of the market require strong loan evaluation and monitoring

systems, especially since information imperfections are acute: the quality of borrowers

financial accounts are often bad, many borrowers lack a track record of successful business,

etc The problem for many of the failing banks was that they did not have enough

experience to screen and monitor their borrowers, and therefore distinguish between good and bad

bad risks. Also, credit procedures such as loan and loan documentation

security and internal controls, were frequently very deficient. Managers and directors of these

banks often lacked the necessary knowledge and experience.

Recruiting good staff was often difficult for local banks because established banks

it could normally offer the most talented bank officers better career prospects. Also, the

The rapid growth in the number of banks outpaced the supply of

experienced and qualified bank officers.

Macroeconomic instability contributed to some extent to these failures;

Poor credit quality problems faced by local banks were exacerbated by

macroeconomic instability. Periods of high and very volatile inflation occurred in Cameroon, just before the devaluation of the FCFA. With interest rates liberalized, nominal lending rates were also high, with real rates fluctuating between positive and negative levels, often unpredictably, due to the volatility of inflation.

Macroeconomic instability would have had two important consequences for the loan

quality of local banks. First, high inflation increases the volatility of corporate earnings.

because of its unpredictability, and because it normally involves a high degree of variability in

the rates of increase in the prices of the particular goods and services that make up the

general price index. The probability that firms will make losses increases, as does the probability

that they will make windfall gains, intensifying both adverse selection and adverse incentives for borrowers to take risks and thus the likelihood of default.

The second consequence of high inflation is that it makes loan evaluation more difficult for

the bank, because the viability of potential borrowers depends on unpredictable

the evolution of the global inflation rate, its individual components, exchange rates and

Interest rates. Also, asset prices are likely to be highly volatile in such conditions.

terms. Therefore, the future real value of the loan collateral is also highly uncertain.

In conclusion, we should not be scared when we see that microfinance houses are multiplying today in the economic capital of Cameroon, Douala and Yaoundé, all of them very involved in the banking sector, it is simply as a result of these huge bank failures registered in the past years.